Friday’s Kwasi-Budget was not officially a budget, despite being on of the most important fiscal statements since the Thatcher era. Because it was not a budget, it was not scrutinised by the Office of Budget Responsibility. That is yet another example of the Conservatives trying to circumvent processes designed to ensure that government’s act rationally.
This was a budget that will make top earners even more wealthy, while leaving the country and the poorest more impoverished. It was a budget based on the discredited myth of trickle-down economics. It was a budget that will allow wealthier people to dine out in style while those on the breadline scramble for crumbs.
This is an idealist budget driven by a leader who is beginning to make Margaret Thatcher look left wing.
The stamp duty cuts are labelled as “getting the housing market moving” despite a buoyant property market. The lifting of thresholds will help first time buyers but will also fuel an already inflated housing market and make housing less affordable. It will have particular impact on homes selling for under £250,000, where prices are likely to rise. Some industry experts predict that a short term hike in prices will be followed by a fall, leaving some owners on high interest mortgages in negative equity. There was no cut in VAT, which while it will benefit high spenders, would ease costs, especially for small businesses.
That is going to have an impact on building new housing as mortgage rates and borrowing costs rise might lead to the very opposite of what Kwasi Kwarteng is intending, stalling the housing market. It will also favour those with capital or who can release capital through selling property in the southern east and London and increase the migration of retirees to the south west, the Welsh Marches and Cumbria.
A cut in stamp duty won't help 99% of people who are struggling to buy their own home, but will make it even more attractive for people to buy a second home in places like Cumbria.
Once again the Conservatives have shown that they don't care about rural Britain. pic.twitter.com/zGHnVJ2sXw
— Tim Farron (@timfarron) September 23, 2022
There was no help for the poorest through an uplift in Universal Credit, which was cut back after the pandemic and is since worth around £1,000 less a year due to inflation. Those not earning more than £12,500 a year will gain nothing, while people on minimum wage will gain just £135 a year. Part time workers on Universal Credit will have to work an extra three hours a week, which will not always be practical or possible. As the Institute for Employment Studies says: “The problem for the economy and employers is that we don’t have enough workers, not that our workers don’t work enough hours.”
Borrowing was already set to rise higher than earlier OBR forecasts due to the government’s intervention in domestic and business energy prices. The Debt Management Office (DMO) has forecast that borrowing will rise by £72.4 billion – an eye watering 45% – to £234.1 billion for 2022-23.
Ministers are gambling on economic growth to pay off these enormous debts. That’s quite a gamble. Many commentators are comparing Kwarteng’s budget to Anthony Barber’s ill-fated boom and bust budget of 1972. There could be an uncanny resemblance. An inflationary economy stoked further by an ideological budget. The impact or war – Yom Kippur, now Ukraine. Soaring energy prices – oil, now gas. Worker unrest and strikes. A plunging pound. Although there are no suggestions though that yesterday’s budget will lead to Britain going cap in hand to the International Monetary Fund as it did following Barber’s budget, the Institute of Fiscal Studies says the plans are unsustainable. And in the background, the world economy is slowing perhaps close to the point of tipping into a worldwide recession. The Bank of England says the UK is already in recession and has warned that interest rates will continue to rise.
The markets have the jitters after Kwarteng’s budget. We already have a record trade deficit. And the pound, which had been weakening, is now close to parity with the dollar and declining towards parity with the Euro. Those falls are raising import inflation which will hit most businesses, including the construction industry where imports have increased, labour costs have risen and material costs have risen exponentially since 2021.
In 2020, LSE academics concluded after an international study that “reducing taxes on the rich leads to higher income inequality” and “do not have any significant effect on economic growth”. The same authors said in 2022 that trickle-down economics doesn’t work. President Joe Biden echoed the same points in a speech a few days ago. But UK governments have long shifted from the New Labour ideal of 1997 that policy decisions should be evidenced based, though that ideal was only partly delivered.
It is certainly a time to borrow. But the Growth Plan does not aim to spend public funds in a Keynesian fashion to boost infrastructure – the infrastructure spending in the growth plan is modest. It aims to put borrowed money into the pockets of shareholders and the wealthy. That is sheer madness. And it will hurt the most vulnerable in our society.
* Andy Boddington is a Lib Dem councillor in Shropshire. He blogs at andybodders.co.uk.
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14 Comments
Although there are no suggestions though that yesterday’s budget will lead to Britain going cap in hand to the International Monetary Fund as it did following Barber’s budget,…
That came much later, in 1976, after two years of Labour government…
‘The IMF Crisis, 1976’:
https://www.gresham.ac.uk/watch-now/imf-crisis-1976
@Jeff I think that’s the cycle we are going to see again: Tories trash the economy in a really fundamental way, but it doesn’t bottom out in a spectacular crisis until a year or two after Labour have been elected. In subsequent decades everyone ‘remembers’ that Labour trashed the economy.
I was honestly shocked the first time I learnt that the Tories held power for much several years in the 70s. I’d always thought of it as Labour’s failed decade of socialism, or something.
Andy’s headline succinctly pinpoints what should be the mission of a responsible government – a stable economy. Confidence is the most important factor in maintaining economic stability. The government cannot of itself engineer growth only provide for the conditions that enable growth and stability in what are more often than not turbulent global conditions.
Whether the headline top rate of tax is 45% or 40% will have a negligible effect on economic conditions, impacting only those 629,000 taxpayers that pay the additional rate. It is a political decision rather than economic policy.
Confidence and economic stability are aided by maintaining spending on public services, consistent rates of taxation and stable purchasing power of the currency i.e. a policy of sound money and fiscal prudence. This is what underpins the economic resilience that would enable the UK to weather the multiple storms emanating from global shocks.
Liberal Democrat economic policy needs to be firmly focused on providing stability and engendering confidence. That is best achieved on a foundation of land value tax and adoption of the reforms advocated by the late James Mirrlees in his comprehensive 2010 review of the UK tax system.
Former Dem is, I think, right. The Tories know they are toast at the next election and hope that the hard work to rescue Britain from Basket-case economic status will fall to others from 2025, potentially a Lab-Lib Dem coalition or informal arrangement. This makes it crucial that a very public and permanent wedge is driven NOW between the One Nation Conservatives and the hard right Kwarteng Conservatives on the scale of the Lloyd George Asquith split in the old Liberals back in 1923 so that they don’t get back in 2030. Lib Dems should seek out for especially hard attack those Conservatives currently supporting Truss and leave their most caustic attacks aside in favour of “more in sorrow than in anger” commentary on the Sunak and One nation wings of the Conservatives, who have been limp wristed and pathetic advocates for sound economics.
Jeff 25th Sep ’22 – 2:03pm….That came much later, in 1976, after two years of Labour government…
Labour came to power in 1974 when the UK was in the middle of a recession; a recession exacerbated in the UK by Barber’s ‘bubble’ and Heath’s 3 day week. Economic growth was re-established, under Labour, in 1975…
BTW… Post Labour, Thatcher’s ‘monetarist’ policies resulted in the UK’s early 1980’s recession and over 3 million unemployed..Only her ‘engineered’ Falkland’s war saved her..
This morning I watched Laura Kuenssberg’s ‘grilling’ of Kwasi Kwarteng…
Unsurprisingly she didn;t ask him about his ‘Britannia Unchained’ claims..
1) “If you run up unsustainable debts then eventually people will stop lending you money.”
2) “A spendthrift government will soon discover that it is a lot easier to hand out goodies than it is to take them back.”
and especially 3) “It should be obvious that pledges to spend more on public services, not raise taxes and maintain public services, form an impossible triangle.”
I’m confused. Do you think this budget will increase house prices or decrease house prices? You seem to be arguing that it will cause house prices to both rise and fall?
Increasing interest rates were already happening and more inevitable before the mini-budget but it will undoubtedly push them higher. That will push house prices down. The reduction in stamp duty obviously reduces net buying prices and increases net selling prices. It should produce a bit less mis-allocation which would reduce prices very slightly.
Then there’s the general upward redistribution of income which will probably push up the price of expensive houses and bring down the price of cheaper ones.
Complicated economics very pointless when kids are going hungry.
Does Rashford have to intervene again, or does anyone know which charities are doing something? No use waiting for the govt
https://www.theguardian.com/business/2022/sep/25/schools-in-england-warn-of-crisis-of-heartbreaking-rise-in-hungry-children?CMP=share_btn_tw
@Expats, I’m very aware that challenging Tories predominantly by reading their past words back to them implies that their past words were correct or that, in normal circumstances, Tories are the authority we look to for good governance. Labour are best challenged by showing them to be hypocrites but Tories try to say they’re an evolving beast so I don’t think it works the same way – especially when they’ve been getting the economy wrong since Osbourne/Cameron and this is just an exaggeration of that.
@Chris Love, the charities I’m aware of are having internal conversation about what to say to people when they’re in desperate need of support but have exhausted all options, with awareness that this is going to happen more and more often. In some ways, we’re now reliant on private individuals wanting good publicity which is a shameful state to be in.
From my new home in Greece, once thought of as the basket case of the EU, I see things happen in my homeland that even Margaret Thatcher refused to countenance – and God knows, she was bad enough. Greece still has problems, though I have seen the obvious economic recovery since that crisis and I suspect that the current Conservative PM will be re-elected when the election comes in a year’s time.
I first learned about the theory of trickle down economics in 1971, when I studied for an Advanced Diploma in Development Economics. It seemed pretty dubious even then and the various experiments with it since have shown it to be totally untenable. It threatens not only those on low incomes, but the whole of our post war welfare state, which is already teetering on the edge of disaster.
I do feel that pandering to so-called one nation Tories detracts from the wider aim of spreading Liberal Democracy. One-nation Tory MPs know where we are and they can leave the Tories and join us as some did pre 2019. We need to put forward radical policies about how we want to move the UK away from its current path and onto a more democratic sustainable future. That’s the way to attract more support, not trimming our sails in the hope a few more Tory voters will support us.
The Government’s recent measures will increase income inequality and poverty and yet many of the least well off will believe the Government when it says it is helping them. It is beyond belief that the Government is to lift the cap on banker’s bonuses which was introduced after the 2008 banking crisis when half the tax payers money used to bail out the Royal Bank of Scotland, for example, went straight out in bonuses to the very people who had failed to prevent the crash. Instead of lifting the cap on bonuses why not link them to the interest paid to investors? There is little incentive for people to save for their retirement when their savings don’t keep pace with inflation. And the low interest rates of the passed decade have hit retired people particularly hard.
And isn’t it about time that the link between electricity and gas prices was broken, that the pricing structure was changed so that the first so many units of gas, electricity and water were free with the price increased for higher consumption and the excessive profits used to reduce prices? The British economy is driven by the greed of the few.
That is going to have an impact on building new housing
that’s not a bad thing. Its about the only good thing that will come out of this budget.
@Kit
I’m confused. Do you think this budget will increase house prices or decrease house prices?
It will do both. Adding in the falling pound, the UK housing market is even more attractive to offshore investors/speculators, these will tend to flock to new developments, pushing up prices. However, for UK residents, mainly operating in the “secondhand” housing market, expect prices to fall. Which will mean for those buying new homes, they will be paying a premium over (secondhand) market price for a new home and thus will be in negative equity.
With a proper constitution we would never have got into this mess. The Conservative Party is superb at manipulating our present patchwork to its own advantage. We must do all we can to help create a legal mechanism that prevents the misuse of power and ensures the electorate can play a larger part in our democracy.